RECOGNIZE THE BLOCKCHAIN INVESTING OPPORTUNITY - 1

Blockchain Coinvestors Newsletter

Vol. 4, No. 9, May 2022 

RECOGNIZE THE BLOCKCHAIN INVESTING OPPORTUNITY - 1

We begin this week's newsletter with a quote that HashKey Capital used in their most recent newsletter. 

 

"The Chinese use two brush strokes to write the word 'crisis.' One brush stroke stands for danger; the other for opportunity. In a crisis, be aware of the danger - but recognize the opportunity." John F. Kennedy.

 

The world is in the middle of tumultuous times and it is appropriate to assess the impact on our investment thesis, strategy, and fund performance as well as see if there are likely to be opportunities in this moment.

 

Our summary is as follows:

  • Dangerous Times. To add to the dangers of COVID, Inflation, Russia/Ukraine, and a Crypto Blizzard, we now have to add the collapse of a Korean based protocol - Terra/Luna

  • Impact on Investment Thesis. We see no reason to change our investment thesis - digital monies, commodities and assets remain inevitable

  • Impact on Investment Strategy. We see no reason to change our investment strategy of focusing on early and mid stage blockchain venture opportunities - equity and tokens

  • Impact on Fund Performance. Our evaluation will not be completed until we see the next quarterly reports from our fund managers, but we can say today:

    • Blockchain Coinvestors has no direct exposure to the Terra/Luna protocol or the tokens it has issued

    • Within our family of fund of funds we see 3 out of 45 funds that have more than minor direct exposure so the overall impact given our massive diversification should be slight

    • At the same time, indirect impacts on our funds and their portfolio companies and projects will take time to feed through

  • Recognize the Opportunity. The analytical evidence says that venture capitalists outperform following a downturn and the best strategy is to heavy up by investing into the downturn

  • Stick to Best Practices of Venture Investing. We always stick to the best practices of venture investing; we don't plan to change this disciplined approach in any way as the rest of 2022 unfolds

  • Bottom Line. We are excited to have capital to deploy, and plan to do so as we get greater clarity on where the best blockchain investors are placing their next round of bets.

Please note we have closings for all of our funds coming up in the next six weeks. Contact our team at IR@blockchaincoinvestors.com to learn more.

 

DANGEROUS TIMES

 

We will not add anything to what you already are reading about the various impacts of COVID, Inflation, Russia/Ukraine and a Crypto Blizzard on investing. The newspapers are full of these matters. However, we do want to explain to our readers what just happened at the Korean based protocol Terra/Luna. The most succinct explanation we have read comes from our portfolio fund Hashkey - selected extracts follow:

 

  • "This past week the entire crypto market fell into extreme panic caused by the depeg of Algorithmic stablecoin terraUSD (UST)."

  • "The most direct consequence of the collapse of UST is for the immediate foreseeable future, there will not be algorithmic stablecoins."

  • "We have to wait a while to assess further collateral damages, such as potential losses suffered by institutions holding or market-making Terra’s native token LUNA."

Terra/Luna's failure is important and significant. No one is clear what caused it, and no one knows yet the full direct and indirect impacts. However, at Blockchain Coinvestors we were not believers in algorithmic stablecoins, and have no direct exposure to them.

 

IMPACT ON INVESTMENT THESIS

 

We see no reason to change our investment thesis - digital monies, commodities, and assets remain inevitable. You can review the webinar Blockchain Coinvestors Investment Thesis or read again Blockchain Competitive Advantage to understand what our investment thesis is, and why we believe these various crises are accelerating and not retarding the progress towards the digital economy of the future.

 

IMPACT ON INVESTMENT STRATEGY

 

We see no reason to change our investment strategy of focusing on early and mid stage blockchain venture opportunities - equity and tokens. While we see great volatility in late stage public markets (traditional and liquid crypto) we are not public market traders, we do not invest in public liquid tokens as a core strategy, and we don't invest in stablecoins. While we don't understand how price is set in good times or in bad in liquid public markets, we know that early stage investing is among the highest returning asset classes and we expect this will continue to be true. That is why we focus on being early to mid stage venture investors.

 

At Blockchain Coinvestors we have worked for a decade to create our unique sustainable competitive advantage (USCA) in blockchain. This USCA derives from the fact that we are investors in, and have developed relationships with, more of the best blockchain funds than anyone else - as far as we know. To this we add a team with more than 100 years of collective investment experience in these sectors. This in turn gives us proprietary access and asymmetric information that informs our coinvestment opportunities.

 

We leverage this advantage into three investment strategies all of which are focused on early and/or mid stage blockchain venture capital investing:

  • Fund of funds early/mid stage strategy

  • Early stage token direct investment strategy

  • Mid stage growth direct investment strategy

In Newsletter - vol 4, no 5 (IS IT TOO LATE?) we shared our views on how many years we should expect for the digitalization of monies, commodities, and assets to play out. At least 40 years we said then, based upon the experience we have all lived through as we have mostly completed the process of digitization of communications and content over the last 50 years. In that newsletter we concluded by asking you not to stay in bed all morning and let the world's greatest value and wealth creation pass you by.

 

IMPACT ON FUND PERFORMANCE

 

Our evaluation of our fund performance will not be completed until we see the next quarterly reports from our fund managers, but we can say today:

  • Blockchain Coinvestors has no direct exposure to the Terra/Luna protocol or the tokens it has issued

  • Within our family of fund of funds we see 3 out of 45 funds that have more than minor direct exposure so the overall impact given our massive diversification should be slight

  • At the same time, indirect impacts on our funds and their portfolio companies and projects will take time to feed through

We look forward to reporting our next quarterly fund performance later this summer, and our funds continue to be the highest performing in their categories worldwide according to Pitchbook and Preqin.

 

RECOGNIZE THE OPPORTUNITY

 

A lot can be written about how the central thesis of investing (buy low, sell high) tends to get forgotten in downturns. Many people feel that they need to exit stage right when the play is going badly and the audience is throwing rotten tomatoes. It is not the right strategy for an investor.

 

The analytical evidence says that venture capitalists outperform following a downturn and the best strategy is to heavy up by investing into the downturn.

 

The chart that follows is one we have used before in webinars around the arrival of COVID. It comes from State Street data and shows how small, mid-sized and large buyout and venture capital funds perform around downturns. While TVPI is essentially consistent across funds in the two years leading into a downturn, venture funds specifically see superior returns in the two years following the bottom of a downturn.

We believe there are four reasons for this outperformance of venture capital:

  1. Valuations fall so that venture capitalists get more for their money

  2. Competition between start-ups declines as there is a flushing out of marginal and bootstrapped players

  3. Follow on financing becomes focused on the emerging category leaders backed by the best investors

  4. Less obviously, large enterprises who often represent both large customers of innovation and go to market partners, and who are the most likely exits for startups through acquisition, scale back during turndowns but then find they have to invest and buy to grow during recoveries. They become much more likely to embrace innovation in T+1 and T+2.

For these reasons, seasoned venture capitalists know that they need to invest more capital, not less, when opportunities start surfacing during a downturn - in a selective and disciplined way.

 

Some of our best performing fund managers have been quick to point this out:

  • "Broadly, risk sentiment continues to degrade as public equity markets decline and capital seeks a safe harbor from the macro storm. As you might expect, we welcome this revaluation as the increasingly elevated private market valuations were, in our opinion, unsustainable. Going forward, we expect significantly more attractive valuations as the market’s irrational exuberance subsides and ephemeral crypto market participants curtail their investment activity accordingly." Blockchain Capital Partners

  • "Recent market downturn has certainly created short term price volatility for our funds, but to a long-term ecosystem investor like HashKey, current market environment represents an attractive timing to discover and partner with high quality venture investment opportunities, as well as better valuation entry point for liquid cryptocurrencies." HashKey Capital

  • "While our industry’s detractors will obviously make a big deal of this failure, it doesn’t say anything about the overall promise of blockchain. It’s similar to the dot.com era. Lots of experiments were tried – some worked, some didn’t. The failure of Pets.com didn’t mean the internet was stupid. It just meant that one business model wasn’t right for the time. If Luna does in fact fail it only means that that one type of algorithmic stablecoin didn’t work." Pantera Capital

We concur.

 

STICK TO BEST PRACTICES OF VENTURE CAPITAL INVESTING

 

Which brings us to the subject that we have studied for 25 years and more. What are the best practices of early stage investing?  You can listen to our webinar Mastering Early Stage Investing to learn more, but suffice to say the summary is shown below and is embedded into our Blockchain Coinvestors investment strategies.

We always stick to the best practices of venture investing. We don't plan to change this disciplined approach in any way as the rest of 2022 unfolds.

 

BOTTOM LINE

 

To sum up we see opportunity now surfacing just as it always does during a downturn. For venture capitalists, the returns are usually higher in the years following a downturn for some very good reasons. We are excited to have capital to deploy, and plan to do so as we get greater clarity on where the best blockchain investors are placing their next round of bets. We look forward to continuing to deliver phenomenal returns to our investors.

 

Please note we have closings for all of our funds coming up in the next six weeks. Contact our team at IR@blockchaincoinvestors.com to learn more.

 

If you have any other questions please do not hesitate to reach out to us or to any member of our team. 

Thank you for reading.

Alison Davis
Matthew C. Le Merle

ABOUT BLOCKCHAIN COINVESTORS

 

Launched in 2014, our goal is to provide broad coverage of the emerging unicorns and fastest growth blockchain companies and crypto projects. The strategy is now in its 9th year and has to date invested in more than 40 pure play blockchain venture funds in the Americas, Asia and Europe; and in a combined portfolio of 400+ blockchain and crypto projects including approximately 50% of all blockchain unicorns. Our funds rank in the top decile amongst all funds in their respective categories on both Pitchbook and Preqin. Headquartered in San Francisco with a presence in Grand Cayman, London, New York, Zug and Zurich, the alternative investment management firm was co-founded by Alison Davis and Matthew Le Merle.

FUND PERFORMANCE

 

Blockchain Coinvestors Fund III (Fund of Funds) was created to provide diverse coverage of the best blockchain pure play venture funds in the Americas, Asia, and Europe. Blockchain Coinvestors Funds I and II have already experienced significant appreciation. Fund I Net TVPI is 4.72x with an IRR of 72%. Fund II shows equally impressive early results with Net TVPI of 2.08x and an IRR of 146%. Almost all of our fund investments are performing as top quartile against the Cambridge Associates Venture Benchmark.

BLOCKCHAIN COINVESTORS FUNDS

Blockchain Coinvestors’ goals are to provide broad coverage of the emerging unicorns and fastest growth blockchain companies and to capture superior returns from investing in the leading blockchain venture partnerships. Our funds are open to investors that meet the Qualified Client definition with a minimum subscription level of $250,000 at the discretion of the Manager. 

 

  • Blockchain Coinvestors Fund III (Fund of Funds) was created to provide diverse coverage of the best blockchain pure play venture funds in the Americas, Asia, and Europe. Blockchain Coinvestors Funds I and II have already experienced significant appreciation. Fund I Net TVPI is 3.64x with an IRR of 69%. Fund II shows equally impressive early results with Net TVPI of 1.72x and an IRR of 161%. Almost all of our fund investments are performing as top quartile against the Cambridge Associates Venture Benchmark.

  • Blockchain Coinvestors Fund IV (Early Stage Token) provides direct access to promising private stage token projects accessing our relationships with many of the world’s leading blockchain investors. We leverage asymmetrical information from our 40+ VC Funds to pick the most attractive opportunities. This is a continuation of the direct token investing strategy of the Fund Manager that has included private stage investments in Acala, Filecoin, NEAR, Polkadot, Structure, and others.

  • Blockchain Coinvestors VI (Mid Stage Growth) provides direct exposure to the emerging category leaders in the blockchain and crypto ecosystem. The fund leverages our unique sustainable competitive advantage (USCA) in blockchain, web3, and fintech to create a concentrated portfolio of between 20 and 30 investments with attractive return profiles and visible paths to liquidity. The fund assesses the more than 400 blockchain and crypto projects in which we are direct and indirect investors and employs a robust investment framework to select investment opportunities into the leading mid stage growth rounds - typically Series B, C and D. This is a continuation of the mid stage investing strategy of the Fund Manager that has included investments in Bitwise, Brex, InfiniteWorld, Securitize, Uphold, Wyre, and others.

Please visit the Blockchain Coinvestors website to learn more about our offerings. You can also reach our Investor Relations team directly at ir@blockchaincoinvestors.com.

BLOCKCHAIN COINVESTORS SWISS

We are excited to announce that Blockchain Coinvestors Funds are now available through Swiss certificates for those of our non-US investors who prefer this approach. The underlying fund is the same, however, our Zurich based team at Blockchain Coinvestors Swiss, who will introduce in future weeks, can provide detailed information regarding this investment option. Email us at mlemerle@blockchaincoinvestors.com to learn more.

BLOCKCHAIN COINVESTORS ANGELLIST SYNDICATE

Continuing the theme of the democratization of investing, we have a rapidly growing Blockchain Coinvestors syndicate on AngelList providing access to selected coinvestments. Please join us and our partner Lou Kerner on AngelList.

Click here to receive the insightful weekly crypto newsletter and webinar invitations from our Blockchain Coinvestors partner Lou Kerner.

REGISTER NOW FOR UPCOMING WEBINARS AND CALLS

 

Our investment team hosts bi-monthly webinars and calls to help educate our community about the Fifth Era, fintech, blockchain and crypto. We discuss important trends, tailwinds and investment themes including what we have learned and how we are using our knowledge to inform our own investment thesis and actions. Below is a list of upcoming webinars for which you can register by clicking the links:

 

Meet the CEO: Live Session with Archax CEO Graham Rodford

- May 25th, 7:00am PT

 

Blockchain Coinvestors Investment Thesis

- June 6th, 7:00am PT
- June 6th, 12:00pm PT

 

What Are NFTs?

- June 20th, 7:00am PT
- June 20th, 11:00am PT

 

Recordings of past webinars and calls can be found at www.blockchaincoinvestors.com/webinars.

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